Under Delaware law, director actions are twice-tested: first for legal authorization under a company’s organizational documents or positive law, and second under equitable fiduciary principles. A company’s organizational documents may only eliminate or modify fiduciary duties and the attendant judicial standards of review to the extent expressly permitted by the Delaware General Assembly. When director actions affect an election of directors or a stockholder vote on matters of corporate control, the board’s actions must satisfy enhanced scrutiny under the legal test set forth in Blasius Industries v. Atlas.
In Totta v. CCSB Financial, No. 2021-0173-KSJM (Del. Ch. May 31, 2022), the Delaware Court of Chancery held that a board’s action, invalidating stockholder votes in a proxy contest, did not comply with the voting limitation in the company’s charter, and interfered with the effective exercise of a stockholder vote in a contested election of directors under Blasius. By way of background, the board applied a voting limitation set forth in the company’s charter that prohibited a stockholder and those stockholders acting in concert with one another from exercising more than 10% of the company’s stock voting power in an election of directors. The board instructed the inspector of elections not to count the insurgent stockholder’s votes as well as the votes of other stockholders, with whom the insurgent was allegedly acting in concert, in excess of 10% of the company’s stock voting power. As a result of the board’s action, the alleged insurgent stockholder nominees lost the proxy contest.
In Totta, the Court of Chancery first put to rest the defendant’s argument that the board’s determination that certain stockholders were “acting in concert” for purposes of aggregating their shares to apply the 10% excess voting power limitation was conclusive-and-binding, and thus, not subject to judicial review under equitable fiduciary principles. The court reasoned that the defendant’s argument contravened fundamental principles of Delaware law that “a corporate charter may not alter the directors’ fiduciary obligations and the attendant equitable standards a court will apply when enforcing those obligations”—unless expressly authorized by an affirmative act of the Delaware General Assembly.
While the voting limitation itself was facially valid, the court nevertheless found that defendant failed to demonstrate that the stockholders were “a group acting in concert” for purposes of aggregating their shares to apply the 10% excess voting power limitation under the company’s charter. The company’s charter did not define “acting in concert.” Under well-settled Delaware case law, the court turned to a dictionary definition of “acting in concert” for assistance in determining the plain meaning of this language in the charter. Merriam-Webster defines persons acting in concert “when they have an agreement, arrangement, or understanding regarding the voting or disposition of shares.” None of the facts proffered by the defendant supported a finding that the stockholders were acting in concert pursuant to a mutual agreement, arrangement, or understanding as to how to vote their shares. Accordingly, the court concluded that the board's action not to count their votes in excess of the 10% voting power limitation under the company’s charter was legally invalid.
Applying enhanced scrutiny, the court held that the board action was also void under Blasius. Satisfying the first step of Blasius, the court found that the board’s primary purpose in not counting the stockholders’ votes was to interfere with the effective exercise of the shareholder franchise in a contested election for directors. Under the second step of Blasius, the court then concluded that the board failed to demonstrate a compelling justification for its action. The board’s justification for its action not to count the stockholders’ votes in excess of the 10% voting power limitation was to avoid a takeover of the board by an alleged corporate raider, who desired to sell the company’s Community Bank. The court explained that the decision to elect nominees must be left to the stockholders, and the board has no right or obligation to exclude stockholder votes for nominees under the auspices of protecting stockholders from this outcome, with which the board did not agree. This board’s sole justification was, therefore, antithetical to and foreclosed by Delaware law, which vests the right to elect directors in the stockholders regardless of whether the board agrees with the nominee directors’ positions or outcomes.